- The Greenback on the backfoot this Tuesday while the US-China trade deal euphoria quickly fades.
- Traders see April’s US CPI release not really showing inflationary signals after Liberation Day.
- The US Dollar Index slips back to 101.50 after failing to reclaim the 102.00 level.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, corrects to near 101.50 ahead of the US trading session on Tuesday. The partial paring back of Monday’s gains comes as traders become wary of the lack of detail on the recent trade deal between China and the United States (US). Besides slashing the tariffs, no forward dates or topics are set, raising questions on what has been discussed, similar to the UK-US trade deal from Thursday.
Meanwhile, on the economic data front, the US Consumer Price Index (CPI) release for April came in broadly in line of expectations. For now, that feared inflationary shock has not materialized and sees traders carefully consider the possibility of rate cuts from the Federal Reserve. Overnight, Federal Reserve (Fed) Bank President of Chicago Austan Goolsbee warned that even current tariff levels will still have an inflationary impulse, the New York Times reported.
Daily digest market movers: CPI tepid
- On Monday, President Trump lashed out at the European Union (EU), saying that the US has the upper hand in its trade discussions with the EU. “The European Union is in many ways nastier than China. We’ve just started with them. We have all the cards. They treated us very unfairly,” Trump said at the White House.
- At 10:00 GMT, the National Federation of Independent Business (NFIB) released its Business Optimism Index for April. The actual number came in at 95.8 compared to the previous 97.4. The expectation was for a 94.5.
- The April US Consumer Price Index data came in not really shocking:
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- Monthly headline CPI came in at 0.2%, lower than the 0.3% expected and away from the disinflationary -0.1% in March. The yearly figure came in at 2.3% from the previous 2.4%.
- The Monthly core CPI came in at as well at 0.2%, just missing the 0.3% estimate and a touch higher from 0.1% in March. The yearly figure is set to remain unchanged at 2.8%.
- Equities see US futures brush off their earlier negative performance and turn positive on the day.
- The CME FedWatch tool shows the chance of an interest rate cut by the Federal Reserve in June’s meeting at just 8.2%. Further ahead, the July 30 decision sees odds for rates being lower than current levels at 38.6%.
- The US 10-year yields trade around 4.45%, starting to wobble with traders assessing possible rate cut bets for the Fed after these steady CPI numbers.
US Dollar Index Technical Analysis: Where is that inflation?
Warning lights flashing this Tuesday for the US Dollar Index from a pure technical point of view. The fact that the DXY was unable to break 102.00 and closed below the important 101.90 technical level is opening up the door for a harsh retracement back to 100.00. The US CPI release later this Tuesday could be vital to either broaden the rejection with a weaker Greenback or push it firmly above 102.00.
On the upside, the DXY is flirting with a technical rejection against 101.90, which acted as a pivotal level throughout December 2023 and as a base for the inverted head-and-shoulders (H&S) formation during the summer of 2024. In case Dollar bulls push the DXY even higher, the 55-day Simple Moving Average (SMA) at 102.29 comes into play.
On the other hand, the previous resistance at 100.22 is acting as firm support, followed by 97.73 near the low of 2025. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
(This story was corrected on May 13 at 13:04 GMT to say that Headline yearly inflation is 2.3% instead of 2.4%.)
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